Talk:Sunk costs
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[edit] Magnitude of loss aversion
I'm sure there are studies, either in economics or in psychology, which seek to quantify the degree to which people are "waste-averse". It might be interesting to cover some of those results. -- Ryguasu
- The page on Loss aversion (linked from the article) says that people are about twice as averse to a loss as attracted to gains. Josh Parris # 06:46, 27 October 2005 (UTC)
- For example, when you pre-order a movie ticket, the price of the ticket becomes a sunk cost. Even if you decide that you'd rather not go to the movie, there is no way to get back the money you originally paid and you have a sunk cost on your hands. This assumes, of course, that you can't simply return the movie ticket for a refund, and that you can't resell the ticket.
...Both of which, you usually can, making this a particularly stupid example.
[edit] Too much Second Person
Use of the second person ("you") is generally discouraged as per Wikipedia:Manual_of_Style#Avoid_the_second_person. Ewlyahoocom 17:02, 31 January 2006 (UTC)
- Mischief Managed Brian Sayrs 00:31, 15 April 2006 (UTC)
[edit] Omission: bottom line often entails a loss.
In addition to the sunk cost, there are usually more costs associated with sticking to the original plan. In the example of the movie ticket, the buyer would still incur some expense in getting to the movie theater, and might pay a lot more money for a soda than he would have had he stayed home. Therefore, not only is the bottom line theoretically unaffected by seeing through with the decision, but it usually is entails a loss.(edited to correct spelling of omission)
[edit] Omission: terminology
The terminology often used to explain the effect of the sunk cost contains the words "Bottom Line." Meaning the bottom line is the same whether or not the person chooses to actually go, therefore the cost should not be part of the decision.
Also, the language used to explain the emotional side of the argument usually contains the terms: "retroactive" and "legitimize." Thus the person who considers going even though he no longer wants to does so in order in an attempt to emotionally "retroactively legitimize" the poor decision to buy the ticket in the first place.(ditto omission)
[edit] Omission: the role of ambiguity
There is a set of studies showing how the sunk cost effect is due to the ambiguity of the situation rather than some irrational reasons. Ambiguity allows to interpret a situation in a way that is consistent with the continuation of an investment. In fact the consideration of a failed investment as affected by the sunk cost is often made ex-post that is after the results have appeared. This latter judgment about a seemingly fallacious situation is considered itself as retrospective fallacy.(ditto omission and ambiguity)
[edit] Not all investments are (typical) sunk costs
I think that one problem with the article is that it equates all investments with sunk costs. In the example with the ticket someone has bought for a movie that he doesn't want to see, the costs of the ticket are indeed not recoverable. They are sunk costs.
But in case of Elia Kazan's films most of the money for most of his films the studios invested in could be recovered. Sure, he used the "point of no return" tactic to trick the studios into investing even more money. But those weren't really sunk costs. They could be recovered.
It is important to make this distinction, as in the case of the cinema ticket the economically sound decision is to just throw the ticket away. Otherwise more money is spent on something that was a failure in the first place. But in the case of the Elia Kazan films it actually made sense to spend more money to finish the film and recover costs by getting the film into the cinemas.
This distinction is also important for pricing decisions: For example, if a company has made a really bad investment into a failed first attempt to develop a product, but succeeded to develop it in a second try, it is wrong to calculate the product's price on the base of the full cost of all the investments that went into the product. The costs for the failed first try do not belong to the product.
A competitor who got things right with just one try would easily undercut that price, and the product might be a failure in the market just because it is overpriced. Which then would mean that the costs for the second development effort would be sunk costs as well.
But it is also wrong to completely ignore investment costs in product pricing because asking for a price that is significantly higher than the variable costs is the only possibility one has to recover investment costs. --84.149.171.40 01:04, 28 August 2006 (UTC)
- It seems to me that the Elia Kazan story is a perfectly good example of sunk costs. The studio can't sell back the exposed film or demand that the actors and techs return their salaries. Completing the film and distributing it for a profit does not recover the sunk costs--it generates new revenue. Economically, the sunk costs subtract from the total costs of completing the movie, which improves the ratio of future costs to anticipated revenue. But if the future cost/benefit ratio is still poor compared to other competing projects (for which all costs are future costs), a rational studio exec should abandon the project.
- Also, both product development efforts are legitimate costs of the product, and if I were pricing a product based only on development costs I would certainly count the first, failed effort as well as the second one. If a competitor enters the market, my pricing will have to adjust to be competitive, but that has nothing to do with my development costs.
- You seem to be confusing the term "sunk cost" with "total loss"; sunk costs are often recouped when a project is completed; the term just describes those costs which cannot be recovered simply, such as by returning unsold inventory. --209.6.25.155 04:44, 10 May 2007 (UTC)
When determining sunk costs, one has to define what to include when determining what the question should be. If one buys a ticket to go see a movie, only the first part is a monetary one, hence 'sunk costs'. Deciding whether using the time lost at the movie for other endeavors would be more monetarily beneficial is the decision in question.The movie making example is closer to building a factory. A factory has to be built first to make money second. $20 million already invested - $10 million to complete, but can make another one for $5 million it is clear which choice to make. A movie has to be completed to make money. Now whether making a new movie from scratch would be a better choice, would depend on the cost of making a second movie. Marketing of the first movie would already have begun as well as anticipation already generated from expecting the movie to be completed. Not to mention controversy about cost overruns makes for great publicity. Would making a second movie make more money than finishing the first. One wouldn't make a second factory for another $20 million if the first one could be finished with another $10 million. The examples given do not determine the ability to recoup costs as part of sunk costs but more so to the accuracy of the choice in question. One cannot recoup the cost of spending money on a movie ticket..deciding if it is worth going to said movie is the choice. The sunk costs should not interfere with the choice involved. The spent x dollars on movie A so far. New decision now. Can they make more dollars from making movie B at cost z or make more from movie A of new cost y not including cost x so far.
[edit] References
It will take friggin' forever to find which source is for which part of this article. —The preceding unsigned comment was added by 128.101.70.97 (talk • contribs) 16:22, 14 September 2006 128.101.70.97.
[edit] Sunk cost fallacy and War
How else can you explain the troop buildups in Vietnam and now Iraq? Just because you bought the ticket to the wrong movie doesn't mean you have to go... 12.41.40.20 21:26, 11 January 2007 (UTC)
The author seems to neglect fixed costs, that are also opposed to variable costs but different from sunk costs. —The preceding unsigned comment was added by 84.56.2.66 (talk • contribs) 15:21, 9 February 2007 84.56.2.66.
[edit] Merge from bygones principle to here
Please look at the information in Bygones principle and see if you think it should be merged here. The merge from Bygones principle was actually suggested on that page in 2006. --SueHay 01:33, 10 March 2007 (UTC)
- They seem to be similar enough to support a merge to me at least. --86.128.255.115 13:51, 5 June 2007 (UTC)
If only to make it easier for the search engine to find the page, this page should have the phrase "throwing good money after bad" somewhere on it. It's a colloquial form often used in actual boardrooms :) —Preceding unsigned comment added by 81.226.53.31 (talk) 12:11, 15 October 2007 (UTC)
